Creative versus Reactive Trading
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Price Headley BigTrends.com |
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While we often focus on technical indicators in our BigTrends Daily TrendWatch, perhaps the more widely overlooked area is the psychology of trading that ultimately determines whether you will win or lose, based on how you think. Read below why successful traders don't see things the same as the crowd.
"The difference between 'reactive' and 'creative' is that you 'C' differently." I forget who said this originally, but it's symbolic that the way that we see trading opportunities is everything in determining attractive or unfavorable trading situations. Why is it that multiple studies of traders show that the majority of individuals lose money? I believe one of the major reasons is that most investors are too reactive; jumping onto a trend only after the move has become blatantly obvious.
I once saw a fascinating presentation by Jack Schwager, author of the excellent "Market Wizards" trilogy of books. He studied sector mutual funds, which overall averaged positive returns, and then tracked the asset levels at which investors were piling in or bailing out of these funds. These sector funds typically saw big surges in assets near their peaks, while seeing big outflows near their lows. As a result, the majority of investors lost money, even though the funds showed positive performance for the year.
Ask yourself in your trading, "Am I being too reactive in how I trade, or is my method creating new trading opportunities with plenty of room to run?" I am a big proponent of technical analysis, but often technical indicators alone are not enough. Fundamentals are important long-term, but usually are far too slow to change and by that time the trend has typically dramatically reversed.
That's why I'm a big believer in sentiment indicators. Measures of crowd opinion are vital, especially in today's more volatile markets, as markets are moved by the level of buyers or sellers existing in the market at any point in time. We've studied and utilized the CBOE Volatility Index (VIX), Put/Call Ratios, and other sentiment indicators for quite some time -- usually looking for reversal points based on a contrarian perspective.
I've also found that technical indicators which can move quickly and that will often precede the next big leg of a trend move are very useful. In particular, I have found that our BigTrends Percent R methods, and proprietary indicators I've created such as Acceleration Bands and Efficiency Ratio are very effective in gaining a profitable edge in your trading.
Trade Well,
Price Headley
BigTrends.com
1-800-244-8736
Price Headley is the founder of BigTrends.com, which provides investors with specific real-time stock and options strategies and investment education to profit from significant market trends. Timer digest recognized the success of BigTrend.com’s investment strategies by ranking Price among the Top 10 Market Timers for stock market timing for the 2000 calendar year.